Fears of the U.S. dollar going to zero or losing its “reserve currency” status aren’t new…
I’ve been in the markets for 30 years. And I’ve heard these rumblings the whole time.
I’ve also heard that our country’s debt is too high for the government to keep raising the limit. And I’ve heard that inflation is the “hidden tax” that will end the American way of life.
Now, I can’t deny that U.S. debt has risen significantly over the past few decades. And more recently, we’ve all learned what soaring inflation can do to our spending power.
But the thing is… the “end of days” never comes.
As I’ll discuss today, we could see more downside in stocks in the short term. But looking at the big picture, it’s still best for us to keep putting our money to work in the right places…
First, all the doom and gloom I laid out above boils down to one thing…
Fighting inflation.
For investors like us to do that, we need to buy good companies at the right price and time.
We also need to realize that most investors buy stocks because of the “real interest rate.” That’s simply the rate of return on a one-year U.S. Treasury bill minus inflation.
Today, the interest rate on the one-year U.S. Treasury is at its highest level in 15 years. It’s at roughly 5.4%.
You might think an annual return like that would be the end of stocks. After all, who wants to risk their money in the stock market when they could earn a relatively safe 5.4% every year?
But something else that gets in the way of this bond-investing “end of days” scenario…
“Real” interest rates.
You see, the Consumer Price Index (“CPI”) rose 3.7% year over year through September.
So today, the difference between this inflation gauge and the one-year U.S. Treasury’s yield is about 1.7%. That’s the real interest rate.
Plus, before the money hits your bank account, you also need to account for taxes…
Now, I’m not a tax adviser. And everyone’s situation is different. But here’s the simple math…
The real interest rate for a one-year U.S. Treasury before taxes is roughly 1.7% today. If you fall into the 40% tax bracket, you’d keep around 1% when the dust settles.
That’s terrible.
It’s why bonds are still a poor choice. And it’s why stocks remain attractive for investors…
Heck, General Electric (GE) is one of the oldest companies in the market. And its stock is up almost 60% since early January. No one ever expects that type of rally in bond prices.
So my point is simple…
A lot of folks fear the end of days once again. But real interest rates on bonds are still terrible due to inflation. As a result, stocks remain an attractive option for investors today.
Before I wrap up, I want to make one thing clear…
More downside in stocks is possible in the near term. But over the longer term, the upside is a lot better than the average real interest rate.
That makes stocks the easy choice for investors like us.
Good investing,
Pete Carmasino
